[This
review was published in the Summer 2012 issue of The Journal of Social, Political and Economic Studies, pp.
249-257.]

Book Review

Free Trade Doesn’t Work: What Should
Replace It and Why

Ian
Fletcher

Coalition for a Prosperous America, 2011 edition

The old labels that squared “Free Trade” off against
“Protectionism” hardly seem adequate in today’s context, since old habits of
thought about them will incline us toward a far too quick and simple
prejudgment of an issue of great intricacy and importance.As everyone knows, developments in
transportation and communication have in recent decades brought into existence
the tornadic winds of global competition, exposing
nations, firms and workers to rapid displacement by low-cost producers and
workers from parts of the world that used to be effectively quite distant.To those who look only to “economic
efficiency,” this is praised as “creative destruction”; but those who focus on
a desire of particular peoples or localities to retain or develop industries
that will not be nullified by the distant competition will seek ways to prevent
their being blown away.According to
nineteenth-century economist David Ricardo’s law of “comparative advantage,”
all economic actors are assured “something to do,” but that something may be
very different from the aspirations or the long-term capabilities of a given
people.

Ian Fletcher’s Free Trade Doesn’t Work is among the very best books on the
subject.Although the candor of its
title, which indicates a clear dissent from the prevailing faith in global
markets, may turn many people away, the book is one that everyone, from
whatever point of view, will profit from reading.(We say this on the premise that serious
readers realize the intellectual insufficiency of reading only what they
already believe.) While immensely informative about economic history, the
book’s main strength is in its straight-forward, in-depth discussion of the
vitally important conceptual and policy issues that underlie the subject.

It has become commonplace among those
who see the flaws in the Ricardian analysis to praise
the brilliance of Ralph Gomory and William Baumol’sGlobal Trade
and Conflicting National Interests (2000).Fletcher joins in this, his rationale being that “finally, someone has
found a way to translate this eminently practical wisdom [of the anti-free
trade position] into the abstruse mathematics economists are prepared to
consider ‘serious’ economics.”While we
can see from this that the Gomory-Baumol contribution
is indeed meaningful, it is a distinct advantage of the Fletcher book, so far
as most readers will be concerned, that it eschews the “abstruse mathematics”
and confines itself to a serious, albeit eminently readable, discussion in
ordinary language.

Educated at Columbia and the
University of Chicago, Fletcher was a research fellow at the United States
Business & Industry Council before becoming senior economist at the
Coalition for a Prosperous America.The
book’s first edition, in 2010, was published by the Council, and the revised
second edition by the Coalition.

As one would expect, there is
considerable information in Free Trade
Doesn’t Work about the United States’ slipping economic condition, which
has been marked by a hollowing-out of American industry that began as long ago
as the 1960s.He talks about the loss of
what was once a pronounced lead in high technology; about the shift to financialization; about the loss of U.S. jobs, including
those in engineering and architecture; and about the deindustrialization.When he asks “why are we doing this to
ourselves?,” he says that there is some free-trade fanaticism, but that the
main factor is simply the near-universal naïve belief that economists must be
right in their adherence to the Ricardian faith.This is augmented, he says, by U.S.
businesses’ hewing closely to their individual interests, by the political
clout of defense contractors, and by such venalities as that “fully half the
American trade diplomats who left government service went to work for foreign
nations.”President Obama, he recounts,
has played both sides of the free trade/protectionist issue according to what
has been politically advantageous from time to time, but since his election has
mainly acted according to free trade orthodoxy (such as by not renegotiating
NAFTA as he had once stoutly affirmed that he would in a primary
election-season debate with Hillary Clinton).Fundamentally, Obama “appears to know nothing about trade beyond the
received Ricardian wisdom.”

We won’t rehearse Fletcher’s
discussion of U.S. slippage or of the neomercantilist
measures that many nations use to protect and stimulate their own
industries.Those important subjects
receive widespread attention elsewhere.What is more unique to the book is Fletcher’s analysis of eight
(actually, nine) “dubious assumptions” made by the Ricardian
comparative advantage/free trade theory.This discussion goes directly to the heart of the intellectual edifice
that so much commands obeisance today despite the disastrous effects of the
policy.The power of ideology is so
strong in the contemporary world, and most especially among Americans despite
their presumed pragmatism, that the most important single factor in changing
policy is to change the prevailing mental fixations.

The assumptions that Fletcher
criticizes are mostly features of the “comparative advantage” concept as an
economic model, which, as all such models are, is hedged by all sorts of
limiting conditionality.To those not
familiar with the intricacies of that model, those conditions are bound to seem
technical.What Fletcher’s criticisms do
is to show that the model’s assumptions differ significantly from the world as
it is.One is that “trade is
sustainable,” to which Fletcher responds that resources for a given activity
may run out.Another is that “there are
no externalities” (i.e., factors that flow from economic activity but that
aren’t added into or subtracted from the price);Fletcher points out that there are many, such
as environmental damage, and that free trade encourages a society’s skimping on
them.A third is that factors of
production internal to a country are readily mobile, facilitating the movement
of economic activity to what best serves comparative advantage.This suffers, according to Fletcher, from the
relative immobility of people and buildings, the difficulty in relocating
workers, and the cost of writing off past investments.On the other hand, the theory posits that
capital isn’t mobile across borders
(Ricardo even wrote that an international mobility of capital “would undo his
theory”).With trillions of dollars
flowing in global finance in today’s world, this crucial element is clearly not
met.Another assumption is that trade
doesn’t increase income inequality, another premise that runs counter to so
much present-day experience.Others that
Fletcher rebuts are that trade does not induce adverse productivity growth
abroad, and that “there are no scale economies” (the fact that there are major such economies is, in fact,
what Gomory and Baumol base
their mathematical refutation on).

When Fletcher recites the theory’s
assumption that “short-term efficiency causes long-term growth,” this is an
oddly obscure statement of what is perhaps Ricardo’s key assumption – and
greatest weakness.The point needs to be
understood, as Ricardo’s theory does not, that what a society does well today
is not necessarily a sound basis for concluding that that fixes the
“comparative advantage” for all time.Ricardian analysis is a static snapshot of comparative
efficiencies at a particular point in time, and takes no account of the dynamic
process of change.What countries are
best at can and will change, and countries can do much to bring that change
about.In part, the change can come from
learning to do entirely new things.Fletcher points out that “it is better to have comparative advantage in
some industries than in others,“ since “free trade does not automatically
assign nations good industries.”This
reviewer made essentially the same point in his article “A Critique of Free
Trade Theory” in this Journal’sWinter
1998 issue when he wrote that “the dynamic
view of comparative advantage – that competitive standing changes over time if
some of those who are not the cheapest producer retain their capacity to
compete – is a much more sophisticated view of the market than the static
view.”[1]

This relates to what we might consider
an eighth “dubious assumption,” which Fletcher discusses but doesn’t include in
his list per se.It is the unrealistic assumption that a
people will be content to be existentially defined (i.e., to do and to be)
whatever economic efficiency says they should do.But we can readily see that this subordination
of a society’s identity to “economic efficiency” runs counter to a great many
values, including many that are non-economic, that a people may cherish.Eighteenth and nineteenth century Americans,
for example, weren’t content simply to be suppliers of resources and
agricultural products to the British industrial economy; as Americans look back
today, they are glad they adopted policies breaking out of so narrow a
channel.This is a point of vast
significance, since it relates to a people’s entire way of life and self-image.

An arguable weakness in Fletcher’s
discussion is his failure to question the idea of “efficiency,” which has
become the holy grail of economic thinking.It is true that a dynamic, rather than static, view of comparative
advantage is intended best to serve the desire for productivity and innovation
(hence, efficiency).But the additional
point, that there are other values than efficiency for a society to consider
important, unmasks the utterly deficient reductionism that comes with putting
all our eggs in the “efficiency” basket.It should be pointed out that the exclusive valuing of efficiency stems
from the concept of “an optimal allocation of resources,” which is really the
linchpin of the tightly-packed ideology of free market fundamentalism.This reviewer has explained in the article
mentioned above just why it is that the “optimum allocation” idea is a
fallacy.Ironically, while the concept
of“optimum allocation” is central to
the thinking of the Austrian School of Economics and was strongly articulated
by Ludwig von Mises, one of the School’s leading
thinkers, it violates one of Mises’ own most
important insights.[2]

Fletcher’s critique of the assumptions
underlying Ricardian theory is augmented by an
enlightening discussion, at assorted places in the book, of the many
“sophistries” that are used on behalf of free trade theory.Here is his critique of some of them:

1.“It is sometimes claimed that our trade deficit is really a savings
problem in disguise.”Fletcher says that
“this implies that trade policy is irrelevant… [and] this analysis depends upon
misunderstanding the arithmetic
relationship between trade deficits and savings rates as a causal relationship” (his emphasis).

2.“It has been repeatedly suggested that the U.S. is on the verge of an
export boom that will erase our trade deficit.”To this, he observes that because of the U.S. “import-driven
deindustrialization… we no longer have the productive capacity to balance our
trade by exporting more goods.”

3.“A myth that has been promoted for decades to justify American trade
concessions to [China]…” is that free trade will democratize China.Fletcher notes that although the commercial
advantages have made a good many Chinese rich, the effect has been that “this
authoritarianism now has a huge constituency outside government itself.”

4.“Free traders since 19th-century classical liberals like the
English Richard Cobden and the French Frederic Bastiat
have promised that free trade would bring world peace.”Fletcher says this “does not survive
historical scrutiny,” observing that “Britain, the most freely trading major
nation of the 19th century, fought more wars than any other power.”

5.“The common plaint that ‘all we want is a level playing field’ is just
another way of asking for fair trade.”This, he says, requires “that nations have the same domestic economic
policies.”The trouble is that “a true
level playing field would require America to supervise the domestic policies of
foreign nations, which is not feasible” (especially since “there are literally
thousands of places in an economy where export subsidies can be hidden”).

6.“Another popular half-truth, especially on the left, is that free trade
guts government by destroying its ability to tax.”This is refuted by “the hard fact that over
the 1965-2006 period of increasingly free trade, government revenue has simply
not fallen in any of the advanced economies.”

7.“The ‘notorious’ Smoot-Hawley tariff of 1930 is sometimes blamed for all
or part of the Great Depression.”There
are several parts to Fletcher’s response to this: that the argument is
“implausible, given that the Depression was already taking hold”; that “it was
proved by economist Milton Friedman (at least to the satisfaction of the Nobel
Prize committee) that the Depression’s cause was monetary”; and that the tariff
did not cause the Depression to spread worldwide, because it was in fact too
limited to have that effect (“it only applied to about one-third of America’s
trade… [and] our average duty… went from 44.6 to 53.2 percent – hardly a
radical change”).

8.“Neither does the myth of a death spiral of retaliation by foreign
nations hold water.”The U.S. State
Department reported in 1931 that “with the exception of discriminations in
France, the extent of discrimination against American commerce is very slight.”

9.It is argued that free trade has reduced global poverty.Fletcher says in rebuttal that “the World
Bank standard for poverty is $2 a day, so ‘moving a million people out of
poverty’ can merely consist in moving a million people from incomes of $1.99 a
day to $2.01 a day.”He paraphrases a
World Bank report, saying that “the entire net global decline in the number of
people living in poverty since 1981 has been in mercantilist China, where free
trade is spurned.Elsewhere, their
numbers have grown.”

10.Fletcher discusses in detail the assertion that NAFTA and other free
trade agreements have been beneficial to the participating nations.He says that 90 percent of the agreements
pertain to other things than free trade, foremost among them being protections
of foreign investors from expropriation.There are, he says, 3,000 American-owned factories comprising “the maquiladora plants along the U.S.
border,” and these “employ over a million workers.”But even though they have the most advanced
production technology, these plants “have spawned no industrial revolution” in
Mexico.The agreements, containing a
number of secret provisions and sped through the American Congress through a
“fast track” method that permits no amendments and only limited debate, are
“profoundly antidemocratic,” according to Fletcher.

There’s no magic in stopping the
enumeration at a rounded ten, but we will leave it to readers to glean others
from the text.This review is, of
course, no substitute for studying the book itself

Before we conclude, we should note
that a critique, however meritorious, of “free trade versus protection” is by
no means a complete discussion of what needs to be considered to meet the
economic and social needs of a country like the United States in today’s
world.As Fletcher recommends, the
protection of high-tech, high-value products will be essential to the
reindustrialization of such a hollowed-out economy as that of the United
States.But the displacement of workers
and stagnation of middle class incomes won’t be overcome, in either the medium
or long terms, by shielding such an economy from low-cost foreign labor. The reason is that the radical advance of
non-labor-intensive technology continues, and will shift the return of economic
activity ever more toward capital and away from remunerated employment.Massive immigration at both the low-wage and
high-tech levels will also continue, unless abated, to undercut jobs and wages
for the bulk of the population.The
question will be how to establish the basis for a dynamic, free productive
system, on the one hand, and an essential distribution of the wealth created by
it to the general population, on the other.This is why this reviewer has proposed “a shared market economy,” which
he explains elsewhere.[3]Further, what is now known as the Great
Recession has demonstrated the continuing need of a capitalistic economic system
for a monetary/banking system appropriate to its health and stability.The lack of such a system has long posed an
existential threat to a market economy.These are all difficult matters that deserve, but don’t seem thus far to
be receiving, a radical rethinking.To
read this reviewer’s thoughts on the subject of monetary reform, see his
article “Capitalism’s Deepening Crisis: The Imperative of Monetary
Reconstruction” in the Fall 2011 issue of this Journal.[4]

What is essential is that all of these
things be considered, with input from many sources.Fletcher’s book is an ideal place to start.

[2]For a complete discussion of why the
“optimum allocation” argument is fallacious, seeDwight D. Murphey,
“Lead Article and Surrebuttal on ‘Does a Market
Economy Optimize the Allocation of Resources,’” in the Journal of Markets & Morality, Vol. 2 (Fall 1999), pp. 271-8
and 290-6.It may be found, also, at www.dwightmurphey-collectedwritings.info
as Article 82 (i.e.,A82).

[3]See Dwight D. Murphey,
A “Shared Market Economy,” book
published in 2009 to his website (see footnotes 1 and 2 for the URL) as Book 12
(i.e.,B12).For a brief statement of the proposal, see
his article “A ‘Classical Liberal’ Rethinks the Market Economy,” Fall 2009
issue of The Journal of Social, Political
and Economic Studies.The
articlemay be found on the website as
Article 100 (i.e.,A100).

[4]This article may also be found on his
website as Article 105 (i.e.,A105).